Equity Research Report

APA

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Generated on: 24 February 2025, Time: 09:59 GMT

Result Summary

APA Group has demonstrated robust operational performance in 1H25, with revenue excluding pass-through growing 7.1% to $1,364 million and underlying EBITDA increasing 9.1% to $1,015 million. The company's successful integration of the Pilbara Energy System, which contributed $66 million in earnings for the half, alongside inflation-linked tariff escalations and increased customer demand for additional services, particularly on the South West Queensland Pipeline and Carpentaria Gas Pipeline, have driven this growth. CEO Adam Watson highlighted that "today's result demonstrates the strength of our underlying business, our continued focus on operational excellence and asset reliability."

The energy infrastructure sector is undergoing significant transformation, with APA well-positioned to capitalize on evolving opportunities. The company maintains a dominant 50% market share in gas transmission, supported by high barriers to entry and strategic asset locations. Management's observation that there is a "growing understanding of the role of gas in Australia's energy transition" is reflected in new project wins, including the Sturt Plateau Pipeline and agreements for CS Energy's Brigalow gas peaking plant. The company's revenue quality remains strong, with 81.2% of Energy Infrastructure revenues coming from investment-grade customers and 86.2% of revenues being take-or-pay/regulated.

The macroeconomic environment presents both opportunities and challenges for APA. Rising interest rates have impacted financing costs, with net interest costs increasing 58.5% year-on-year and FFO/Interest coverage declining to 3.1x from 3.3x. However, the company benefits from inflation-linked revenues providing a natural hedge against cost pressures, while strong demand from resources customers (now 28.1% of revenue, up from 26.1%) supports infrastructure utilization. The operating environment remains supportive of infrastructure investment, particularly in gas transmission and renewable energy integration.

Risk management has become increasingly complex, particularly following the discontinuation of the Wallumbilla Gladstone Pipeline hedge relationship and implementation of a new strategy to separately manage foreign currency exposures on debt and USD revenue. Regulatory uncertainty has emerged as a growing concern, highlighted by the AER's draft decision to reject APA's application to convert Basslink into a regulated asset. The company maintains a strong focus on counterparty risk management, though the percentage of investment-grade customers has slightly declined to 81.2% from 82.6%.

Looking ahead, APA has reaffirmed its FY25 guidance for underlying EBITDA of $1,960-2,020 million and distribution growth of 1.8% to 57.0 cents per security. The company's $1.8 billion organic growth pipeline over FY25-27 demonstrates confidence in future opportunities, supported by strong operating cash flows and balance sheet capacity. Management's focus on cost optimization and operational excellence, alongside strategic positioning in both traditional and renewable energy infrastructure, provides a solid foundation for sustained growth. However, success will increasingly depend on effective navigation of the evolving regulatory landscape and energy transition challenges.

Outlook & Market Conditions

APA Group has delivered strong operational performance in 1H25, with underlying EBITDA growing 9.1% to $1,015 million, driven by successful integration of new assets, inflation-linked revenue growth, and increased customer demand. Management has reaffirmed FY25 guidance for underlying EBITDA of $1,960-2,020 million and distribution growth of 1.8% to 57.0 cents per security. The company's $1.8 billion organic growth pipeline over FY25-27 demonstrates confidence in future growth opportunities, supported by strong operating cash flows and balance sheet capacity. Recent project wins, including the Sturt Plateau Pipeline and Brigalow gas peaking plant infrastructure, validate the company's strategic positioning in Australia's energy transition landscape.

Market expectations remain broadly aligned with management's guidance, though with increased focus on the impact of higher interest costs and recent changes to hedging strategy. The company's ability to maintain distribution growth while funding its substantial growth pipeline is viewed positively, supported by strong operational performance and inflation-linked revenues. However, some analysts may revise near-term earnings estimates to reflect higher financing costs and the accounting impact of hedge relationship changes. The recent regulatory setback with Basslink could also lead to reassessment of regulatory risk premiums applied to future projects.

The operating environment remains supportive of infrastructure investment, particularly in gas transmission and renewable energy integration. Strong demand from resources customers and growing recognition of gas's role in energy transition provide positive backdrop for APA's core business. However, the company faces challenges from rising interest rates, regulatory uncertainty, and the need to demonstrate long-term asset relevance in a transitioning energy market. Market conditions suggest continued demand for energy infrastructure services, though with increasing complexity in managing foreign currency exposures and ensuring adequate returns on new investments. The company's diversified asset base, high-quality customer portfolio, and strategic positioning in both traditional and renewable energy infrastructure provide resilience against these challenges while supporting long-term growth opportunities.

Group Summary

| 1H25 / Feb-25 |

Metric Value (now) Value (pcp) YoY Change
Revenue (excl. pass-through) 1,364 1,274 +7.1%
Underlying EBITDA 1,015 930 +9.1%
EBITDA Margin 74.4% 73.0% +1.4pp
Reported EBITDA 971 840 +15.6%
NPAT (excl. significant items) 34 74 -54.1%
Free Cash Flow 552 533 +3.6%
Total Assets 20,605 19,563 +5.3%
Total Drawn Debt 13,849 12,893 +7.4%
FFO/Net Debt 10.7% 9.9% +0.8pp
FFO/Interest Cover (x) 3.1x 3.3x -0.2x
EPS (cents) 2.6 84.2 -96.9%
DPS (cents) 27.0 26.5 +1.9%
FCF per Security (cents) 42.6 41.5 +2.7%
Distribution Payout Ratio 63.4% 63.9% -0.5pp
Growth Capex 339 432 -21.5%

Group Summary Report

APA Group has delivered a strong operational performance in 1H25, with underlying EBITDA growing 9.1% to $1,015 million, driven by the successful integration of the Pilbara Energy System, inflation-linked tariff escalations, and increased customer demand for additional services. Revenue excluding pass-through grew 7.1% to $1,364 million, while EBITDA margins expanded by 140 basis points to 74.4%, reflecting operational efficiency improvements and cost optimization initiatives.

However, bottom-line performance was significantly impacted by higher financing costs and the absence of prior period one-off gains. Net interest costs increased 58.5% to $412 million, primarily due to foreign exchange losses following the discontinuation of the Wallumbilla Gladstone Pipeline hedge relationship and increased debt to fund growth initiatives. Statutory NPAT declined to $34 million from $1,049 million in the prior corresponding period, largely due to the non-recurrence of the $975 million gain related to the Pilbara Energy System acquisition in 1H24.

Despite these challenges, APA's financial position remains robust with strong cash flow generation and credit metrics. Operating cash flow increased 12.3% to $666 million, supporting a 3.6% increase in free cash flow to $552 million. The company maintained its disciplined approach to capital management with FFO/Net Debt improving to 10.7% while continuing to invest in growth opportunities with $339 million deployed in capital projects. The distribution payout ratio remained stable at 63.4%, enabling a 1.9% increase in distributions to 27.0 cents per security while maintaining balance sheet flexibility for future growth initiatives.

Segment Breakdown

| 1H25 / Feb-25 |
| East Coast Gas Transmission & Storage |

Metrics Value ($m) YoY Change Strategic Impact
EBITDA 376 +7.7% Core business growth
Revenue Share ~29% - Key revenue contributor
Operating Margin 83.4% +0.8pp Margin expansion

| West Coast Gas Transmission & Storage |

Metrics Value ($m) YoY Change Strategic Impact
EBITDA 183 +10.9% Growth from acquisitions
Revenue Share ~14% - Stable contribution
Operating Margin 86.7% +1.2pp Operational efficiency

| Wallumbilla Gladstone Pipeline |

Metrics Value ($m) YoY Change Strategic Impact
EBITDA 338 +5.3% US inflation-linked growth
Revenue Share ~26% - Major earnings driver
Operating Margin 89.2% +0.4pp High margin business

| Contracted Power Generation |

Metrics Value ($m) YoY Change Strategic Impact
EBITDA 134 +21.8% Pilbara integration success
Revenue Share ~10% - Growing contribution
Operating Margin 58.0% +2.1pp Scale benefits

| Electricity Transmission |

Metrics Value ($m) YoY Change Strategic Impact
EBITDA 17 0.0% Stable performance
Revenue Share ~1% - Small but strategic
Operating Margin 45.9% -0.2pp Consistent margins

Segment Commentary

East Coast Gas Transmission & Storage delivered strong growth with EBITDA up 7.7% to $376 million, driven by inflation-linked tariff escalations and increased gas volumes on the South-West Queensland Pipeline and Carpentaria Gas Pipeline. The segment benefited from insurance proceeds relating to lost revenue on the Moomba Sydney Ethane Pipeline. Near-term outlook remains positive with continued demand for gas transportation services, though the segment faces some uncertainty around the Moomba Sydney Ethane Pipeline's future utilization following the Qenos plant shutdown.

West Coast Gas Transmission & Storage achieved robust growth with EBITDA increasing 10.9% to $183 million. Performance was driven by the additional 11.8% ownership interest in the Goldfields Gas Transmission Pipeline and higher earnings from the Northern Goldfields Interconnect, Mondarra Gas Facility and Parmelia Pipeline. The segment's outlook is supported by strong demand from resources customers and strategic infrastructure positioning in Western Australia.

Wallumbilla Gladstone Pipeline maintained steady growth with EBITDA up 5.3% to $338 million, benefiting from US inflation-linked tariff escalation and favorable foreign exchange rates. The pipeline continues to demonstrate its strategic importance in Australia's east coast gas market, though recent changes in hedging strategy have resulted in some short-term accounting impacts on reported results.

Contracted Power Generation showed strong growth with EBITDA up 21.8% to $134 million, primarily driven by the full six-month contribution from Pilbara Energy System assets. However, this was partially offset by lower availability at North West Power System. The segment's outlook is positive as it continues to benefit from the successful integration of Pilbara assets and completion of new projects like the Port Hedland Solar and Battery facility.

Electricity Transmission maintained stable EBITDA at $17 million, with Basslink earnings and business development costs in line with the previous period. The segment faces some uncertainty regarding the regulatory conversion of Basslink, following the AER's draft decision to reject APA's application to convert it into a regulated asset. However, management remains confident in the long-term value proposition of this strategic asset.

Top 3 risk exposures

  1. Interest Rate/Currency Risk
    APA Group faces significant exposure to interest rate and currency movements, as evidenced by the 58.5% increase in net interest costs to $412 million in 1H25. The recent discontinuation of the Wallumbilla Gladstone Pipeline hedge relationship has introduced additional volatility, with $83 million in non-cash finance costs recorded in 1H25. The company has implemented a new hedging strategy to separately manage foreign currency exposures on debt and USD revenue, but this transition creates near-term uncertainty. With $13.8 billion in drawn debt and significant foreign currency exposure through both borrowings and revenues, this risk directly impacts profitability and cash flows. Management's ability to effectively implement the new hedging strategy while maintaining credit metrics (FFO/Interest coverage has declined to 3.1x from 3.3x) will be crucial for financial stability.

  2. Regulatory Framework Changes
    The regulatory environment presents a growing challenge for APA, highlighted by the recent draft decision from the Australian Energy Regulator rejecting the company's application to convert Basslink into a regulated asset. This decision creates uncertainty around future returns from this strategic asset and potentially signals a more challenging regulatory landscape. While regulated assets currently represent only 18% of Energy Infrastructure revenue, regulatory decisions can significantly impact growth opportunities and asset returns. The medium-term implications are particularly concerning as they could affect APA's ability to execute its $1.8 billion organic growth pipeline and achieve desired returns on investment. Management's limited ability to directly influence regulatory outcomes makes this a particularly challenging risk to mitigate.

  3. Energy Transition Risk
    The ongoing energy transition presents both opportunities and risks for APA's long-term asset utilization and strategic positioning. While current market conditions support the role of gas infrastructure in the transition, there is increasing pressure to demonstrate alignment with decarbonization objectives. APA is actively managing this through investments in renewable energy assets and developing its Climate Transition Plan, but the long-term implications for its extensive gas infrastructure portfolio remain uncertain. The company's ability to maintain asset relevance and secure long-term contracts could be affected by accelerated transition scenarios. This risk requires ongoing strategic adaptation and capital allocation decisions to ensure infrastructure assets remain valuable in a rapidly evolving energy landscape.

Management Sentiment Analysis - Operating Environment

Theme Current Commentary Previous Period Sentiment Evolution
Core Business Performance "strong financial and operating result" (1H25) "solid financial and operating result" (FY24) Strengthening
Integration Success "successful integration of Pilbara business" (1H25) "progressed key projects in the region" (FY24) Improving
Cost Management "stabilisation of costs as business optimises" (1H25) "moderation of corporate cost growth" (FY24) Stabilizing
Growth Pipeline "momentum in growth projects" (1H25) "ongoing execution of growth strategy" (FY24) Maintaining
Balance Sheet Position "balance sheet remains strong" (1H25) "balance sheet remains robust" (FY24) Consistent

Profit & Loss Metrics

| 1H25 / Feb-25 |

Metric Value (now) Value (pcp) YoY Change
Revenue (excl. pass-through) 1,364 1,274 +7.1%
Underlying EBITDA 1,015 930 +9.1%
Reported EBITDA 971 840 +15.6%
Depreciation & Amortisation (476) (435) +9.4%
Net Interest Costs (412) (260) +58.5%
Income Tax Expense (49) (71) -31.0%
NPAT (excl. significant items) 34 74 -54.1%
Statutory NPAT 34 1,049 -96.8%
EPS (cents) 2.6 84.2 -96.9%
DPS (cents) 27.0 26.5 +1.9%

Balance Sheet Metrics

| 1H25 / Feb-25 |

Metric Value (now) Value (pcp) YoY Change
Total Assets 20,605 19,563 +5.3%
Total Drawn Debt 13,849 12,893 +7.4%
Total Equity 2,777 3,248 -14.5%
Net Tangible Assets per Security (1.77) (1.27) -39.4%
Net Asset Backing per Security 2.14 2.84 -24.6%
Undrawn Facilities 1,900 - -
FFO/Net Debt 10.7% 9.9% +0.8pp
FFO/Interest Cover (x) 3.1x 3.3x -0.2x

Cash Flow Metrics

| 1H25 / Feb-25 |

Metric Value (now) Value (pcp) YoY Change
Operating Cash Flow 666 593 +12.3%
Stay-in-Business Capex (130) (110) +18.2%
Growth Capex 339 432 -21.5%
Free Cash Flow 552 533 +3.6%
FCF per Security (cents) 42.6 41.5 +2.7%
Distribution Payout Ratio 63.4% 63.9% -0.5pp